Retirees risk ‘income overconfidence’

By Catey Hill

Affluent Americans are pretty confident about their retirement finances, according to a survey released this week by Charles Schwab. But a closer look at some of the numbers in the survey suggests that, for many, that confidence may be misguided.

The Schwab survey covered 1,800 investors with more than $250,000 in investable assets, across nine major U.S. markets. Within that group, 84% say they have a retirement plan in place, and 80% say they are confident about their financial readiness for retirement. Plus, three in four are more or equally as optimistic about being prepared for retirement as they were last year. Just 10% said that they would “have to work at least part time in retirement to have enough money.”

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You’re going to need a bigger napkin.

The not-so-good news is that these investors say they expect to need an average of just $66,000 in income annually, even though their average current income is $115,000. That’s a replacement rate of 57%, and many financial planners and advisers think that’s unrealistically low—especially given the rising out-of-pocket medical costs faced by many retirees. “You should shoot to have 100% of the annual income you are making today,” says Rick Salmeron, a certified financial planner and the founder of Salmeron Financial in Dallas. “While it differs from person to person, it’s unlikely you’ll need less.”

While not every retirement expert sets the bar that high, advisers in general do recommended a few steps that investors can take to get their expectations in line with reality.

Recalibrate your income needs. It used to be that advisors would recommend people save enough to replace 80% of their pre-retirement income in retirement, but these days, many advisors are recommending people bump that up. Though in retirement you may not have expenses like a mortgage, you may incur other expenses like health care and more travel and dining out, says Gregory Alerte, a certified financial planner and the co-founder and managing director of Gregory & Company Comprehensive Wealth Management in Long Island, N.Y. “You could easily spend just as much in retirement as you did when you were working,” he says. To help you set the right level, you can use tools like MarketWatch’s retirement planner, and talk to your advisor.

Consider long-term care insurance. In addition to the insurance policies that many people already have (homeowners, auto, liability, life, etc.), Alerte says that long-term care insurance is a must for most people: “You can have saved so much for retirement only to see it wiped out if you have to pay for a nursing home.” For more about the costs, pros and cons of such insurance, see Elizabeth O’Brien’s recent MarketWatch articles, “Women face a new long-term care dilemma” and “Long term care insurance: Worth the price?”

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About Encore

Encore looks at the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities, needs and priorities of people saving for and living in retirement. Our lead blogger is editor Matthew Heimer, and frequent contributors include editor Amy Hoak, writer Catey Hill, and MarketWatch columnists Elizabeth O’Brien, Robert Powell and Andrea Coombes. Encore also features regular commentary from The Wall Street Journal retirement columnists Glenn Ruffenach and Anne Tergesen and the Director of the Center for Retirement Research at Boston College, Alicia H. Munnell.